On October 31st, 2006 the minority Conservative government annouced a new 31.5% tax on publicly traded income trusts. (This despite a clear election promise just 10 months earlier not to tax income trusts.) Over the next few days about $30 billion in value was lost by income trust investors as the markets reacted to the news.
$30 Billion in Value Destroyed. Ipsos-Reid Poll says:4 million Canadians Hurt
At the time Finance Minister Jim Flaherty said the government acted because it feared trusts generated: (1) less tax revenue for government, and (2) lower levels of investment in the Canadian economy. Things to be concerned about no doubt, but the government produced no evidence or comprehensive analysis to show this was actually happening.
In the days since the announcement, a number of reports from highly credible, expert sources have been released which look at actual data. Some show tax revenues and investment levels are stronger for trusts than corporations. The opposite of the government's premise.
In our Special Report, we take a closer look at the facts and issues surrounding this major event. Our findings are summarized below.
Findings
After looking at the facts, we believe the minority Conservative government's proposed income trust measures do not withstand scrutiny and are not in the best interests of Canadians.
Contrary to the government's stated reasons for proposing the measures, there is no compelling evidence of "tax leakage" or a lower level of investment by trusts. Indeed, new data and more comprehensive analysis indicate trusts generate higher tax revenues for government than corporations do. This makes intuitive sense as average individual tax rates are higher than average corporate tax rates. Trusts simply
How could the government have gotten this wrong ? Our review indicates this decision was made by a small group of people, behind closed doors, with limited data, and without any meaningful external consultation. Given those circumstances, its perhaps easy to see how they ended up with a flawed result.
Based on the facts, we believe the government's income trust proposals are harmful to Canadians on a number of levels:
Huge Losses Suffered by Ordinary Canadians - The way the Tories proceeded caused great harm to many ordinary Canadians, shaving $20-30 Billion off the value of income trusts. Many lost large amounts of their savings, often exceeding a hundred thousand dollars. Some of the worst hit were those whose with modest savings who needed to the higher yields of income trusts to make ends meet and had moved more heavily into trusts after the Tory's express election promise. It is wrong, unconscionable and
"unCanadian" to foist this degree of harm upon ordinary Canadians, when the governing party gave the 'all clear" signal. Click here to read Canadians describe how this has impacted them.
Promise Made - Promise Broken - In the last federal election campaign the Conservative party repeatedly promised not to "raid the nest eggs of retirees" and tax income trusts. Click here to see Stephen Harper on television passionately pledging support for income trusts in the last election campaign.Click here to read Stephen Harper's letter in the National Post acknowledging just how important income trusts are to seniors. Breaking a clear promise so quickly and to the detriment of so many who relied on it shows an unacceptable disregard for honesty, integrity and fair play.
Deficient Decision-Making Process - In the days since the announcement, it has become apparent that this decision was made by a small group of people, behind closed doors, without good "real world" data. Our review has also found the government's analysis was assumptions based and ignored important factors. Neither was the analysis well "tested" through meaningful external consultation. Given the importance and high stakes of this particular decision, we find that to be an inadequate process. Decisions are only as good as the quality of the information and analysis they are based on.
Given that the current and future well-being of millions of Canadians is affected by this, clearly a much more rigorous, comprehensive and transparent process was needed. One that will withstand scrutiny, lead to a tested, high confidence result and provide the basis for sound national policy for years to come.
A Decision Unsupported by Facts - The government said it feared loss of tax revenue and new investment as a result of the increasing number of corporations converting to trusts. But it released no empirical evidence establishing that. In response to formal requests under federal freedom of information laws, the Tory government has since replied that there was no empirical data it relied on in making the decision.
That is unsatisfactory. Before starting a chain of events that cost millions of Canadians billions of dollars, clear and compelling data should have been in hand and publicly released.
The government relied heavily on a thesis of "tax leakage" in justifying its draconian action. Not only did they not substantiate that key premise. In the days since, expert reports anaylzing actual data have pointed in the opposite direction. Click here to read a report by a leading financial analyst that looked at 126 actual businesses that converted to trusts. Based on that "real world" data, he found the government stood to collect on average "2.2 times more in taxes by taxing the distributions of the trust than had been paid by the corporations prior to their conversion".
Failure to Consider Future Social & Economic Costs to Aging Canadians
In reading all the background material associated with the government's income trust proposals, we found the government did not specifically turn its mind to the demographic and interest rate trends now threatening the economic and social well-being of millions of Canadians over 50. Canadians expect their government to be forward looking, especially when such a large segment the Canadian population will be adversely affected.
Promoting an Unfair, Two-Tiered Pension System
The proposed new rules apply only to publicly traded trusts and partnerships.Private trusts and partnerships will be able to continue unaffected under the old rules. Large pension funds, like those of public sector employees, will be able to use their own private trusts and partnerships to make investments and completely avoid the new tax. The two-thirds of Canadians without employer pension funds, who instead use RRSPs or RRIFs, will note have that opportunity and will subject to the new tax. This puts those already at a disadvantage at a much greater disadvantage.
Our Conclusion: A Bad Policy for All Canadians - Based on the facts and the serious concerns listed above, we believe the Conservative's proposed income trust measures amount to bad policy for Canadians.
As an organization, we are very concerned about the demographic and interest rate trends documented elsewhere on this website. Simple math shows they will bring very real hardship to a large segment of Canadians. Higher yielding Income trusts have been a solution for many to help bridge the gap between low GIC and bond returns and the returns they actually need to pay the bills. These proposed measures will, over time, effectively remove that option from the marketplace. And that will make a bad situation worse for many ordinary Canadians. There would have to be clear evidence and very compelling reasons to justify doing that.
To the contrary, much of the available evidence we have examined supports more of a "virtuous circle" view. Income trusts generate greater overall tax revenue to help finance the priorities of Canadians, exhibit strong levels of investment and expansion, and help many Canadians generate the income they need to pay the bills and have a higher quality of life.
Recommendations and Solutions
We have concluded that the underlying premises of the government's proposals are ill-founded and misleading, and that a great many Canadians have been terribly harmed. For the sake of fairness, justice and good government, we believe timely action is needed to correct this.
The Canadian Retired & Income Investors' Association makes the following recommendations in that regard.
The Bare Minimum: At the very least, the phase in period for the new tax on income trusts must go from 4 to 10 years. This will go a long way to undoing the big losses in value suffered by investors as a result of the initial announcement.The enormous destruction of Canadians' savings has had a terrible impact on many ordinary people.
A Better Solution: Extend the transition period from 4 to 10 years AND exempt oil and gas royalty trusts (as REITs were). Oil and gas royalty trusts have many advantages for Canada that have recently been documented in detail. See the CCET report summarized in our full report. Or access the full CCET report at www.canadianenergytrusts.ca/documents/CompleteReportDec2006FINAL.pdf.
The Best Solution:Announce a moritorium on new trust conversions while a proper, high quality, fact based study by a joint Parliamentary Committee/Task Force is conducted. That study and assessment process should be public, transparent, consult widely and have its own highly qualified experts.
At a time when millions of Canadian retired and income investors are suffering from low rates of return on income investments and when millions more's retirement plans hinge on accessing viable rates of return, there needs to be clear, compelling and unassailable data and analysis on this important matter. Anthing less is simply not in the best interests of Canadians. This is too important a decision. We will all benefit from getting it right.
Other Important Information
Victim Impact Statements - Click here to see a collection of statements from ordinary Canadians badly hurt by the income trust proposals.
You Do the Math - Click here to see how the math and people's lives change when trusts are removed from the picture.
Articles - Click here to read a collection of important Articles on the income trust issue.
Major Research Reports - Click here to access all of the major research reports (and soon summaries of those reports to help the average Canadian retired and income investor follow along).
Are You a Victim of the Attack on Income Trusts ?
If so, click here to learn more about what you can do about it.
The Canadan Retired & Income Investors' Association / Association Canadienne des Investisseurs Retraités et des Investisseurs en Placements à Revenu is a federally incorporated not-for-profit corporation representing the interests of ordinary Canadian retired and income investors.
